New debts dangerous for buyers

Saturday

Jun 22, 2013 at 12:01 AMJun 23, 2013 at 9:02 AM

You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, your credit will be checked and rechecked - possibly monitored daily - to make certain that no new debts pop up before you close on the loan.

You can call it Big Brother. You can call it high-tech snooping. But be aware: If you are applying for a mortgage in the coming weeks, your credit will be checked and rechecked — possibly monitored daily — to make certain that no new debts pop up before you close on the loan.

Credit monitoring before closing is a byproduct of the housing crash. Lenders are terrified of having to buy back loans from investors Fannie Mae or Freddie Mac because borrowers have more debts than they disclosed during the application process.

As a result, almost all banks and mortgage companies now keep tabs on credit files between the dates of loan application and settlement. One of the three national credit bureaus, Equifax, offers a popular service that monitors applicants 24/7 and can detect even hints that a home purchaser is planning to add debt before closing.

Say your mortgage application was just approved; you just barely passed the lender’s crucial debt-to-income-ratio test. You start thinking of things you need to buy: furniture, beds, televisions, audio equipment.

So you visit a couple of stores and take up their offers for low interest credit lines.

According to Equifax Vice President Raymond White, undisclosed debts — or fresh inquiries for additional credit — now turn up in almost 1?in 5 mortgage applications. Yet, under Fannie Mae and Freddie Mac rules, any increase in the total debt-to-income ratio of more than 3 percentage points, or that pushes the ratio beyond 45 percent, can put the lender in a vulnerable position. If the mortgage goes bad, Fannie and Freddie can force the lender to buy it back — financial torture for any bank.

White says failure to disclose debts on mortgage applications is a problem seen in all market segments, including among well-off borrowers with excellent credit.